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March 19, 2007
Commerce Minister Kamal Nath has done a great job to try and break the Doha deadlock and get the leading players to now set a new deadline to get things sorted out, but if he is serious about things, India needs to change its tactics somewhat.
There can be little doubt that, in an ideal situation, the US and the EU need to reduce their huge farm subsidies, which are distorting global trade, but if that had to happen, we wouldn't be in the situation we are in today.
Right now the Indian stand is that it is unwilling to make more than a handful of concessions on lowering agricultural import tariffs. But, as a research paper by ICRIER (working paper # 189) points out, while the average import tariff India applies on farm products is around 38 per cent today, the average "bound" tariff is around 115 per cent --bound tariff is the tariff level that India reserves the right to increase duties up to.
So, even if what is called the G-20 formula (this is the one that most expect the negotiations to converge upon) on tariff cuts is applied, India's average tariff will still be around 75 per cent, a figure that is double the current duty rates and offers ample protection to Indian farmers.
Average tariffs, of course, hide a lot of things and there is no doubt there will be products where duty levels could come down to unacceptably low levels. But items like edible oils have bound import duty levels of 300 per cent while the applied rate has never ever gone above 75 per cent in any year--the G-20 formulation will see the bound rate fall to a still very high 180 per cent. Indeed, 85 per cent of India's agriculture import lines have a bound duty of more than 75 per cent, and a third of them over 100 per cent.
If India was to offer more flexibility on individual products, such as those with bound import duties of more than 150 per cent, it is difficult to see how this won't give a huge kick-start to the stalled agriculture negotiations.
After all, while the developed world wants duty cuts, there are a couple of palliatives that go along with it. The first is a small list called Special Products on which duty cuts will be minimal (so, the country can include some items that are critical to farm livelihood in this list, though in a coalition government each ally will want its state's produce to be included in the list!).
The second is a Special Safeguard Mechanism (SSM) that allows countries to hike import duties to temporarily protect domestic agriculture from international price volatility and import surges. Between 1995 and 2001, the same ICRIER paper points out, the US used an SSM kind of trigger on 403 occasions.
There is some debate on whether the trigger should be a just a volume-based one or a price-based one but that's a matter easily resolved--while advanced countries with data systems that capture imports on a dynamic basis find it easy to handle volume triggers, which get activated once imports cross a certain level, price triggers are easier to handle for countries that don't have such evolved data capture. Surely with such flexibility, India can come up with a slightly more nuanced offering?
India has a lot less to fear on what's called Non Agriculture Market Access (NAMA), where the developed world is insisting on using what's called a Swiss Coefficient to lower tariffs on industrial goods. If the final duty is F, the coefficient C and the bound rate B, then F=(BxC)(B+C). So, if the coefficient is 25 and the current bound rate is 30 per cent, the final duty will be 750/55 or 13.6 per cent.
Given how Indian tariffs are coming down, with the Asean levels promised in a few years, there is a fair degree of flexibility here as well--on both the coefficient as well as on the levels at which industrial tariffs are to be bound. Right now, two-thirds of Indian tariffs are not bound and can be bound at levels higher than the actual import duties levied today. Yet, India has not come up with its own firm coefficient that it is willing to negotiate on.
As a result of talks getting deadlocked around agriculture and NAMA, India is unable to make much headway on issues that it is really concerned with in the services sector since it is here that India sees its maximum gains. Surely India's stand on areas like agriculture and industry needs to be conditioned by the gains it stands to make on services?
It is true that India's stand on various issues is also determined by the need to keep its coalition together, the ways things are going, the talks are likely to remain deadlocked around agriculture. We may then have what economist Bibek Debroy coined as No Agreement Minus Agriculture. No one gains from that.
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